Moscow, 20 May 1998 (RFE/RL) -- The European Bank for
Reconstruction and Development is the single largest direct foreign investor in Russia, but pressure to speed up lending has lead to some blunders.

The EBRD has poured millions into the troubled truck maker KamAZ and taken an equity stake in Moscow's Tokobank, which was recently put under Central Bank administration.

Bank officials say such slip-ups come with the territory. Currently, the EBRD is the largest single direct foreign investor in the Russian economy, with more than 3.6 billion ECU ($3.2 billion) worth of projects approved by its board of directors by the end of 1997. With foreign direct investment in Russia still a paltry $10 billion since 1991, the EBRD has clearly dared to tread where the private sector wouldn't.

Bank officials said the EBRD could commit another $2 billion to Russia by the end of the century, ensuring it will remain a major player in the country's fledgling market economy.

The EBRD has been under pressure to speed up lending to Russia to overcome its early rocky years, when the bank was known more for spending lavishly on its London headquarters under former president Jacques Attali than helping the former Eastern bloc back on its feet. Now, however, its resources are being squeezed as demands grow for the EBRD to be used as a piggy bank to integrate East European countries into the European Union. Russia is expected to remain a major focus of the bank's activities, but the pace of new lending could slow down as a result.

By most accounts, the EBRD has had the greatest impact in Russia by spurring banks to begin lending to private industry, considered essential for the economy to get off the ground. It has helped drag in foreign investment and forced dozens of Russian companies and banks to become more transparent as a condition of its financing. And unlike in the more advanced East European countries, such as Hungary and Poland, the EBRD in Russia has not been accused of crowding out the private sector.

But critics say it has still failed to have a significant impact on economic reforms in Russia. As one Western investment banker who asked not to be named put it: "The EBRD should be commended for being in there with both feet. But the impact of the EBRD should be larger than the total sum of its investments. The school is very much out on that."

In many ways, the EBRD is a victim of its own hazy mandate: to make a profit while assisting in the transition to a market economy. It is criticized for investing in risky projects that fail, but it is also attacked as a conservative institution that picks only the best deals.

Its most recent high-profile flop came earlier this month when the Central Bank put Tokobank under temporary administration the day before the EBRD's annual meeting opened in Kiev. The EBRD bought 9.6 percent of Tokobank in 1994 for $35 million, but was apparently unable to influence management or stop the recent spate of rumor mongering that the bank was on the verge of failure.

Tokobank, one of Russia's top 20 banks, had been losing money for the past four years partly due to bad loans and weak management, but it is believed to be well-capitalized and financially solvent.

EBRD officials have scrambled to explain what went wrong, stressing that the Central Bank's move would be temporary. Many believe the Central Bank will not allow Tokobank to fail precisely because of the EBRD's involvement. But the case highlights the EBRD's difficulties exerting control over management in Russia's rough-and-tumble business climate.

Nowhere is this problem more acute than at KamAZ, Russia's largest truckmaker based in the autonomous republic of Tatarstan. It sank $100
million into the company under a 1995 loan agreement, following in the footsteps of many investment banks that were talking up KamAZ as the next undervalued company to take off. Now KamAZ owes some $1.2 billion to creditors, including back taxes, and has only recently restarted production after standing idle since the beginning of the year.

As Reinhard Schmoelz, director of EBRD's Russia team, put it: "In hindsight, it has not been our greatest investment. But it can turn the other way around. Russia needs a trucking industry."

Some in the Russian banking community were shocked by the EBRD's decision to do a deal with KamAZ and thought it ran counter to its
advocacy of sound banking principles. But the loan was made at a time
when the EBRD was criticized for doing too little in Russia.

A source from an international financial institution said: "There's a lot of political pressure to get the money out the door."

Bank officials say the company still has a chance to make it if it accepts outside management team. They defend the decision to invest in the truckmaker, saying it is precisely the kind of deal the EBRD should be doing.

"We certainly don't see Kamaz as a failure," said Neil Parison, the EBRD's resident representative in Moscow. "If you think about what the EBRD is supposed to do, it is to make investments the private sector isn't quite ready for. It is to take risks and help restructure industry."